FFIV - NASDAQ

Good afternoon, and welcome to the F5, Inc. First Quarter Fiscal 2026 Financial Results Conference Call. Also, today's conference is being recorded. And I'll now turn the conference over to Ms. Suzanne DuLong. Thank you, ma'am. You may begin.

Thank you. We will now be conducting a question and answer session. We ask that you please press 1 on your telephone keypad if you would like to ask a question. You may press 2 if you'd like to remove your question from the queue. The first question comes from the line of Matt Hedberg with RBC. Please proceed with your question.

And the next question comes from the line of Tim Long with Barclays. Please proceed with your question.

Thank you. Maybe if I could do one software, one on hardware. Just on the software side, I get that tough year over year, comparison in the December, but the sequential know, looks like it was a little worse than normal. So, you know, how do we think about that in the quarter and how we can get to mid-single digits get that business accelerating? And then just on the hardware side, I'm just hoping you could break down your views a little bit, but it continues to perform very well. Market share versus market growth, it seems like we're starting to see hardware that you're selling or systems that you're selling in maybe new use cases. So maybe the market growth is dynamic is changing. Just love, opinions on both of those. Thank you.

And the next question comes from the line of Samik Chatterjee with JPMorgan. Please proceed with your question.

Yeah. And Samik, I would add we're continuing to see strength on not just from the refresh motion that has a lot of expansion also outside of the refresh motion. We're seeing continued capacity expansion with existing customers. We're seeing we think, some readiness for AI workloads. Then, of course, some of the data sovereignty and regulation drivers that François mentioned earlier.

Got it. Got it. Great. Thank you. Thanks for taking my questions.

And the next question comes from the line of George Notter with Wolfe Research. Please proceed with your question.

That's great. Just as a quick follow-up, any financial impacts, you know, revenue that you lost or costs that you incurred incrementally that you can point to in the December results? Thanks a lot.

Yeah. No. We really didn't see any noticeable impact. You know, we talked about as we went into the call in October that we hadn't yet seen any change in terms of some of the sales metrics that we track around pipeline and close rates, but it was a very short period of time as we reported it. I think that something we're really happy with was just with the response that we have with customers, they were able to move pretty quickly through their remediation activities. And as a result, they were able to get back to business in a short period of time. And so that trend really held through all the way through the quarter in terms of a normal velocity around pipeline generation, you know, predictable close rates. And so it just it was kind of a very healthy execution throughout the quarter. And importantly, also a strong pipeline build as we head into Q2.

Thank you.

And the next question comes from the line of Simon Leopold with Raymond James.

Yeah. And then in terms of the pricing increases, and the impact on revenue, so that where we see the biggest impact is in the systems business. Because those are applied to, you know, they're effectively all net new sales. And so we had a price increase that we introduced last January, so January 2025. And so we're still realizing the benefit of that. That was a roughly mid-single-digit price increase. You know, we had that factored into our outlook for the year. And so we'll continue to look to monetize. On the software side, a little bit more of a muted impact because a lot of our software sales are sold in multiyear agreements. And so it takes time for some of the pricing increases to matriculate through that business, but we are seeing a healthy pickup from the pricing on the software side as well.

Thank you.

And the next question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your question.

Hi, good afternoon. I just have two. First, just on the systems revenue outlook, it's very encouraging to hear about the double-digit revenue growth for the full year. I think the guidance implies around like mid-teens system revenue growth for the full year. And if that's right, could you just maybe talk a little bit about the revenue shape throughout the rest of the year? Is there anything that you would call out that might drive a deceleration relative to the obviously very strong growth that we saw in the December? And then second, I wanted to ask about the EPS upgrade. You beat the midpoint in the December by 85¢. The full year was raised by 85¢. You know, just given what sounds like a very constructive outlook for the top line for the rest of the year, is there anything that you would call out in terms of like incremental costs that would prevent, you know, more of the top line upside flowing down to the bottom line for the full year? Thank you very much.

Yes. So I'll handle both. So on the revenue guide, I think you can see if you take the midpoint of the guidance for the full year, it implies kind of a 4% to 5% growth in the second half and a little bit higher it's around 7% for the first half. So to your point, it does reflect a little bit of a deceleration. I don't think there's anything that we're seeing today that where we have visibility that there will be a deceleration. It's really just that it's early in the year. And so we've seen tremendous strength in the first quarter. We have a good pipeline in the second quarter, and I think what you're seeing is us take a little bit of a measured approach to how we look in the out quarters for the year, but nothing specific that suggests that the business should slow down. And so then to the EPS question, the two things I would point to is we have the gross margin. We took the guidance down a little bit tied to the pricing increases. So that has a little bit of an effect on the operating margin guide. And then just based on the strength that we're seeing in some of these trends, these that we think are pretty sustainable beyond FY '26, we're making some targeted investments that we think can really help drive a better growth outlook in FY '27 and beyond. So we're looking at sales capacity, you know, where we see additional opportunity that we wanna get in front of with some early investments. We're making some investments in the road map, you know, things. And we talked about XOps. So capabilities that we can bring to customers around analytics and telemetry that we think ultimately will drive a higher rate of adoption across the portfolio. And then some just some other features on our road map. So we think it's an opportune time for us to really invest in future growth just given the increased outlook we've got for this current year.

Great. Thanks, Cooper. That's very clear. Appreciate the response.

Great. Thank you, Michael. And the next question comes from the line of Ryan Koontz with Needham and Company. Please proceed with your question.

Super helpful, François. Thank you.

And the next question comes from the line of Tal Liani with Bank of America. Please proceed with your question.

Hey, guys. It's Tomer

Yeah. So just a couple of factors. So it isn't anything to do with the cadence of the refresh. So we're still relatively early in that opportunity. We have not seen any kind of an acceleration in terms of, you know, decommissioning on the legacy base. So I think it's been orderly. The strength in the refresh has really been around the expansion, and that's tied to the dynamics that François has been outlining that customers are facing today. So I don't think that we expect that to really slow down in the second half of the year. It again, it's just more about where we're sitting in the cycle. It's, you know, a new calendar year. So budgets are still getting cemented with customers. There are some fluid dynamics in just in the macro, and so I think we're just being a little bit pragmatic with how we approach the second half. But the underlying pipeline trends that we're seeing and the momentum in the business is very strong as we entered the quarter, and that's reflected in the Q2 guide. So it's more to do with just, you know, where we sit in the calendar as we're kind of looking ahead on our guidance.

Got it. And maybe just as one quick follow-up on the software side, do you see the renewal cohort equally balanced throughout the remainder of the year, or do you think that's more clustered around the second half?

No. It's more balanced than it has been in prior years. We actually expect to have a pretty strong growth quarter in Q2 and then healthy growth in the second half of the year.

Got it. Thanks.

And the next question comes from the line of Meta Marshall with Morgan Stanley.

And then, Meta, I also wanted to add on the government question. So the US Fed was absolutely the headline around the strength that we're seeing, but that said, we also saw fairly strong results in EMEA as well. With a number of government agencies, particularly around the same data sovereignty concerns. You can imagine those are top of mind for government entities, and so that drove a lot of strength in EMEA in addition to the strength we were seeing in the Fed.

Perfect. Alright. Great. Thanks so much, guys.

And our final question comes from the line of James Fish with Piper Sandler. Please proceed with your question.

Hey, guys. Thanks for squeezing me in here. Just circling back on product refresh. Kind of capacity plus expansion are you seeing typically in I get it. It's hard to tell exactly what your AI exposure to Simon's earlier question, but how are you able to tell that these are capacity plus increases related to sort of traditional general environment versus sort of AI modernization?

Yeah. So one thing that we're seeing is a lot of customers have higher security needs, which is driving a performance. So we've been seeing this for the last couple of quarters, and this trend is continuing where customers are refreshing very often higher up in the portfolio so we're seeing a higher ASP at that time of refresh and then also additional capacities in terms of more units. So it's I'd say it's a combination of kind of getting in front of some of the performance needs for security as well as getting in front of the kind of downstream performances they're anticipating related to AI workloads. And so the customers are just being a little bit more front and center in terms of their planning than we had seen in prior cycles.

Yeah. Thanks, guys.

Thank you. Thank you.

Ladies and gentlemen, that does conclude our question and answer session. I would like to turn the floor back over to Suzanne DuLong for any closing comments.

Thank you, everyone, for joining us today. We look forward to seeing many of you out and about during the quarter.